BILL ANALYSIS Ó
AB 2728
Page 1
Date of Hearing: April 18, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2728
(Atkins) - As Introduced February 19, 2016
Majority vote. Fiscal committee.
SUBJECT: Insurance: community development investments
SUMMARY: Extends the Community Development Financial
Institution (CDFI) tax credit program from January 1, 2017 until
January 1, 2027, as provided. Specifically, the tax-related
provisions of this bill:
1)Extend the authorization of the CDFI tax credit in an amount
equal to 20% of a qualified investment, as defined, made by a
taxpayer into a CDFI for each taxable year before January 1,
2027, instead of January 1, 2017.
2)Authorize the COIN to certify investments for the CDFI tax
credit on or before January 1, 2027, instead of January 1,
2017.
3)Extend the authorization for the Insurance Commissioner to
establish and appoint a California Organized Investment
Network (COIN) advisory board until January 1, 2027.
AB 2728
Page 2
4)Grant priority for allocations of the CDFI tax credit to
insurance company investors over all other tax credit
investors.
5)Delete the current 20% recapture requirement where a qualified
investment amount is reduced prior to the end of the 60th
month, as provided.
EXISTING LAW:
1)Authorizes a credit under the Insurance Gross Premiums Tax
(IT), Personal Income Tax (PIT), and the Corporation Tax (CT)
Laws, in an amount equal to 20% of a qualified investment made
by a taxpayer into a CDFI.
2)Limits the annual certification of total qualified investments
made by all taxpayers to all CDFIs to $50 million for each
calendar year, but if the qualified investments are less than
that amount in one calendar year, the difference may be
carried over to future years and added to the aggregate amount
authorized for those years.
3)Defines "qualified investment" as an investment that is a
deposit or loan that does not earn interest, or an equity
investment, or an equity-like debt instrument meeting federal
or state agency standards. The duration of the investment
must be for 60 months or more and the amount must equal
$50,000 or more.
4)Defines a "community development financial institution" as a
private financial institution located in California that is
certified by the COIN Office of the Department of Insurance,
that has community development as its primary mission, and
that lends in urban, rural, or reservation-based communities
AB 2728
Page 3
in this state. The term "CDFI" includes a community
development bank, a community development loan fund, a
community development credit union, a microenterprise fund, a
community development corporation-based lender, and a
community development venture fund.
5)Prohibits the total amount of investments certified by the
California Organized Investment Network (COIN) in a calendar
year to any one CDFI, together with its affiliates, from
exceeding 30% of the annual aggregate amount of qualified
investment, except as provided.
6)Requires that each year 10% of the annual aggregate amount of
qualified investments be reserved for investment amounts of
less than or equal to $200,000, except as specified.
7)Requires that, in allocating the CDFI tax credit among housing
applications, priority be given to applications that support
affordable rental housing, housing for veterans, mortgages for
community-based residential program, and self-help housing
ahead of single-family owned housing.
8)Provides that the credit is subject to recapture if a
qualified investment is withdrawn before the end of the 60th
month and not reinvested in another CDFI within 60 days. For
a qualified investment that is reduced up to $50,000, only an
amount equal to 20% of the total investment reduction is
subject to recapture.
9)Requires COIN to certify investments for the CDFI tax credit
and authorizes COIN to do so until January 1, 2017.
10)Allows a carryforward of the unused CDFI credit up to four
taxable years, or until the credit has been exhausted,
whichever occurs first.
11)Authorizes COIN to certify investments for the credit on or
before January 1, 2017.
AB 2728
Page 4
12)Provides that the CDFI tax credit is effective until December
1, 2017, and as of that date is repealed.
13)Requires the Legislative Analyst's Office, to submit a report
to the Legislature by June 30, 2016, on the effects of the
CDFI tax credits, with a focus on employment in
low-to-moderate income and rural areas, and on the benefits of
these tax credits to low-to-moderate income and rural persons.
FISCAL EFFECT: The FTB staff estimates that this bill will
result in an annual GF revenue loss of $0.6 million in fiscal
year (FY) 2016-17, $1.9 million in FY 2017-18, and $3.2 million
in FY 2018-19.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"If the COIN tax credit is not extended, low and moderate income
communities in California will lose the support of an
effective program that incentivizes critical investments in
their communities."
2)Background: The COIN Program . The COIN program was created
in 1996 as a public-private partnership by the Department of
Insurance, the insurance industry, state government leaders,
and community development organizations with the goal of
helping to address the unmet capital needs for economic
development and affordable housing in low-income urban and
rural communities throughout California. This voluntary
program was established at the request of the insurance
industry, "as an alternative to state legislation that would
have required insurance companies to invest in low-income
urban and rural communities, similar to the federal Community
AB 2728
Page 5
Reinvestment Act (CRA) that applies to the banking industry."
(Insurance Commissioner Urges California Insurers to Invest in
Low-Income Communities, Press Release, August 6, 2001.) The
COIN program serves as a liaison between insurers that are
seeking investment opportunities and the community
organizations that are seeking investment capital for
projects. CDFIs work with COIN - an office within the
California Department of Insurance - as financial
intermediaries providing access to credit, loans, and
investments to small businesses and non-profits that serve
economically disadvantaged communities. CDFIs also offer
administrative and technical assistance in these low-income
communities. Generally, CDFIs lend to borrowers that do not
satisfy the criteria for conventional lenders and focus on a
particular community or certain groups of people.
3)The CDFI Tax Credit Program . In 1997, the COIN CDFI Tax
Credit program was created to attract and leverage private
capital to fund investments into CDFIs that yield economic and
social benefits for California's underserved markets, as well
as investments that yield environmental benefits. The program
was set to expire at the end of 2011, but was extended until
January 1, 2017. The amount of the credit is equal to 20% of
each qualified investment of $50,000 or more made in a
specified private financial institution located in California
- a CDFI - that has been certified by the COIN as eligible.
The COIN must certify each CDFI and each qualified investment.
A CDFI, among other requirements, must apply to COIN for
certification of its status and on behalf of a taxpayer for
certification of the credit amount allocated to the taxpayer.
The COIN office generally approves applications on a
first-come, first-serve basis, although it has some discretion
in certifying CDFIs. However, the COIN may not allocate in
any calendar year to any one CDFI, together with its
affiliates, more than 30% of the annual aggregate amount of
qualified investments certified by COIN, as specified.
Additionally, each year 10% of the total aggregate amount of
AB 2728
Page 6
qualified investments must be reserved for investment amounts
of less than or equal to $200,000 unless COIN determines after
October 1 that the supply of credits exceed demand.
Furthermore, among housing applications, priority must be
granted to applications that support affordable rental
housing, housing for veterans, mortgages for community-based
residential programs, and self-help housing ahead of
single-family owned housing.
The goal of the CDFI tax credit program is to provide
incentives to attract private capital investments that
otherwise would not be available to CDFIs. This tax credit
may be claimed by taxpayers against the insurance gross
premium tax, the state CT, or the state PIT. The statewide
amount of the credit for all recipients is capped at $10
million per year for the three taxes combined. Every $1 of
the tax credit yields $5 of private investment, with the total
tax credit allocation of $10 million generating up to $50
million of private investments in COIN-certified CDFIs.
However, if less than $50 million is invested in qualified
CDFIs in any calendar year, the remaining amount may be
carried over to the next year and any succeeding year during
which the credit remains in effect. More than $71 million in
qualified investments were approved by the COIN, and more than
$14 million of the tax credits were certified for the 2015
calendar year. The investment amounts range from $50,000 to
$7.5 million. The majority of the investors are banks and
financial institutions, but a few insurance companies, such as
United Healthcare, CSAA Insurance Group, and Metropolitan Life
Insurance Company, were also among the investors.
Most investments that qualify for the CDFI tax credit may also
qualify for the federal New Markets tax credit. Furthermore,
those investments may also qualify for the low-income housing
tax credit and/or the hiring tax credit in targeted tax areas.
The low-income housing tax credit and hiring tax credit
programs are state tax programs that are also intended to
AB 2728
Page 7
generate new investment and economic activity in targeted
communities.
4)Federal "New Markets" Tax Credit Program . Existing federal
law provides for a "new markets" tax credit that permits
individuals and corporate taxpayers to receive a credit
against their federal income taxes for making equity
investments in investment vehicles known as Community
Development Entities (CDEs). The primary mission of a CDE is
to serve, or provide investment capital for, low-income
communities or low-income persons, as specified. The federal
credit amount is equal to 39% of the value of the qualified
equity investment, and is spread over seven years. Thus, in
each of the first three years, the federal credit amount is
equal to 5% of qualified contributions and in each of the
remaining four years the amount of credit is increased to 6%
of qualified contributions. The Department of the Treasury
administers the program and provides allocations of the
federal credits to eligible community development entities
through a competitive grant process when Congress makes the
credits available. The federal limit of the total qualified
investments from all taxpayers for 2015 is $3.5 billion.
5)Gross Premiums Tax . Unlike the federal "New Markets" tax
credit, the CDFI tax credit is also available to insurers that
are subject to the gross premiums tax pursuant to the
California Constitution (Section 28, Article. XIII, California
Constitution). The gross premiums tax is an excise tax on
insurers for the privilege of transacting insurance in
California. The rate of gross premiums tax is equal to 2.35%
of all premiums written. Section 28(a) of Article XIII of the
California Constitution defines an "insurer" to include
"insurance companies or associations and reciprocal or
inter-insurance exchanges together with their corporate or
other attorneys in fact considered as a single unit, and the
State Compensation Insurance Fund." For most types of
insurers, this tax is in lieu of all other taxes except
property taxes and vehicle license fees. Thus, insurers do
not pay tax on other forms of income, such as investment
income or income earned from other trades or businesses. The
AB 2728
Page 8
statutory provisions relating to the assessment and collection
of the tax are contained in Part 7 (commencing with Section
12001) of Division 2 of the Revenue and Taxation Code (R&TC).
The special tax treatment of insurance companies is primarily
grounded in the economics of the insurance industry. Most
corporate taxpayers calculate their income by subtracting
costs incurred in the production of goods or services from the
revenues received from their sale. Insurance companies, by
contrast, collect their revenues up front, then make payments
to policyholders based on contingent events that occur many
months or years later. Thus, it can be difficult to "match
up" revenues to related expenses. In an income tax framework,
insurers ideally would be allowed to deduct the current value
of all future obligations (claims) covered by the insurance
policies they have written when calculating their taxable
income for a given year. Because the actual amount of these
obligations is uncertain, as are the amount of investment
earnings on accumulated premiums received during the
intervening period, an accurate determination of the
theoretically appropriate amount of taxable income proves very
difficult to achieve in practice. Insurers subject to the
gross premiums tax do not pay tax on other forms of income,
such as investment income, or income earned from other trades
or businesses.
6)Temporary Exemption . SBx2 2 (Hernández), Chapter 2, Statutes
of 2016, reduced the gross premiums tax rate from 2.35% to 0%
for specified premiums received on or after July 1, 2016, and
on or before June 30, 2019. The application of this temporary
0% rate is limited to premiums received by an insurer that
provides health insurance and has a corporate affiliate, which
is either a "health care service plan" or "health plan,"
meeting all the following requirements:
a) The plan must be licensed by the Department of Managed
Health Care or be a managed care plan contracted with the
State Department of Health Care Services to provide
AB 2728
Page 9
Medi-Cal services;
b) The plan must have had at least one enrollee in the
health plan in the base year, as specified; and,
c) The plan must be subject to the new Managed Care
Organization (MCO) Provider Tax enacted by this bill.
Thus, health insurers currently subject to the gross premiums
tax will receive the functional equivalent of a gross premiums
tax exemption for FYs 2016-17 through 2018-19, provided the
insurer has a corporate affiliate operating as a health care
service plan subject to the new MCO Provider tax. As such, it
is unclear how much demand health insurers will have for the
CDFI tax credit allocations in the next three years.
7)Priority for Insurance Company Investors . For purposes of
allocating the CDFI credit, this bill proposes to give
priority to insurance companies over all other tax credit
investors, such as banks, financial institutions, or private
individuals. According to the author's office, the intent of
this credit program is to incentivize insurance companies to
invest in California's most underserved communities and that,
after the passage of AB 32 (Perez), Chapter 608, Statutes of
2013, the Department of Insurance issued specific regulations
to prioritize insurers' applications over all other
applications.
Prior to the enactment of AB 32, the law required that priority
be granted to applications that, among other things,
represented investments from insurance companies subject to
gross premiums tax. However, this preference for insurance
companies (repealed by AB 32) was available only when credit
demand exceeded supply. In contrast, this bill proposes to
prioritize insurers' applications regardless of whether the
demand for the CDFI tax credit exceeds supply.
8)The Recapture Requirement . Private investments have a minimum
term of 60 months, and the CDFI tax credit is allocated in
AB 2728
Page 10
year one of the five-year investment period. The credit is
subject to a 60-month recapture period if the investment is
reduced or withdrawn. The COIN is required to provide the
State Board of Equalization or the FTB, whichever is
applicable, with an annual list of the names and
identification numbers of any taxpayers who make any
withdrawal or partial withdrawal of a qualified investment
before the expiration of 60 months from the date of the
qualified investment.
Existing law authorizes a recapture of the entire credit amount
if the qualified investment is withdrawn before the end of the
60 months and not reinvested in another CDFI within 60 days.
However, if a qualified investment is not withdrawn but
reduced (not below $50,000), only an amount equal to 20% of
the total reduction amount is subject to recapture. This bill
proposes to delete the 20% recapture provision, which may be
interpreted as allowing investors to reduce their investments
prematurely without the threat of recapture. However,
according to the author's office, the intent of this bill is
not for the investor to be able to retain the credit while
reducing the investment amount. Instead, the intent is to
recapture the entire amount of the credit allowed if a
reduction in the qualified investment occurs prior to the end
of the 60th month period. Committee staff was informed that
the author plans to revise the 20% recapture provision to
reflect this intent.
9)The Report by the Legislative Analyst's Office (LAO) . As
required by existing law, on April 14, 2011, the LAO issued an
analysis of the CDFI tax credit, discussing the credit's
fiscal impact and the resulting benefits to economically
disadvantaged communities and low-income people in California.
The LAO report noted all the following:
a) Economic Impact . While the LAO was unable to estimate
the economic impact of the tax credits, it states that "in
many cases investments in the CDFIs would not have been
AB 2728
Page 11
made in the credit's absence." The report admits that
"some of the credits have benefited larger CDFIs that are
capable of raising funds in other ways and for which the
credit-funded investments represent a smaller portion of
their total assets." However, the LAO found that, even in
those cases, the tax credits "helped generate investment
activity that otherwise might not have been funded."
b) Credit Percentage Seems Reasonable . The credit refunds
a percentage of the invested amount, which translates into
approximately "2.5 to 3 percentage points on a ten-year
loan at prevailing interest rates," which is "about
one-half of the interest spread between a fairly safe
investment and a very risky one." While the LAO did not
find a 20% subsidy to be too high or too low, it noted that
"changing conditions in financial markets in the future
could warrant a different subsidy percentage for this
credit."
c) Owned Versus Rental Housing . In light of the higher
credit standards for home purchase loans since the collapse
of the housing market, the LAO suggests that in order to
benefit low-income individuals, the CDFI tax credit program
should focus on investments in rental housing, at least in
the near future.
d) First-Come, First-Serve Tax Credits Can Be Problematic .
The LAO advises to authorize COIN or some other entity to
award the credits competitively, instead of a first-come,
first-served basis, to allow the state to prioritize CDFI
investment if there is more demand for the credit in the
future.
10)New LAO Report . Existing law requires the LAO to submit a
new report to the Legislature, on or before June 30, 2016,
regarding the effects of the CDFI tax credits on employment in
low-to-moderate income and rural areas and the benefits of
these tax credits to low-to-moderate income and rural persons.
In light of this requirement, the Committee may wish to
AB 2728
Page 12
consider whether it is prudent to review the LAO findings
prior to extending the COIN program for another ten years.
11)Double-Referral . This bill has been double-referred to the
Assembly Committee on Insurance.
12)Prior Legislation . AB 32 (Perez), Chapter 608, Statutes of
2013, increased the annual aggregate amount of qualified
investments eligible for the CDFI tax credit from $10 million
to $50 million.
AB 624 (Pérez), Chapter 436, Statutes of 2011, extended the
CDFI tax credit program from January 1, 2012 until January 1,
2017.
AB 2832 (Ridley-Thomas), Chapter 580, Statutes of 2006,
extended the operation of the CDFI tax credit program from
January 1, 2007 until January 1, 2012.
SB 409 (Vincent), Chapter 535, Statutes of 2001, extended the
operation of the CDFI tax credit program from January 1, 2002
until January 1, 2007.
AB 1520 (Vincent), Chapter 947, Statutes of 1997, established
the CDFI tax credit program until January 1, 2002.
REGISTERED SUPPORT / OPPOSITION:
Support
California Department of Insurance (Sponsor)
Burbank Housing Development Corporation
AB 2728
Page 13
Opposition
None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098